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Analytics Magazine

Inside Story: Mothers of Invention

March/April 2010

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If necessity is the mother of invention, then deregulation is the father, and revenue management is the couple’s golden child, at least as far as the airline industry is concerned.

The Airline Deregulation Act of 1978 spawned a host of low-fare carriers that could make money while selling seats at a fraction of the price charged by established airlines. That gave the upstarts a huge advantage.

The big carriers, locked into hefty labor and legacy costs, had no clear way of leveling the playing field. Their sheer size became a liability. All major airlines faced a troubling question: How can we compete? If we lower fares across the board, it doesn’t matter if we have a 100-percent load factor — we’ll still lose money. And if we don’t match the upstart airlines’ fares, we’ll lose market share, and eventually we’ll be out of business.

American Airlines solved the dilemma by offering different fare classes in each market. American matched the low-fare airlines’ prices with a portion of its seat inventory on certain routes and saved another portion for late-arriving, high-yielding demand (typically business travelers).

Thus was born the concept of revenue management, but several questions remained: How many seats do you sell at a discount and how many do you hold in reserve? When and by how much do you change the price of each bucket of inventory? Again, analysts and their tools of the trade — forecasting, optimization, etc. — came up with the answers.

Virtually every airline in the world adopted some sort of RM system, and the concept inevitably spread to many other industries (hotel, cruise, etc.) where you find perishable, limited capacity. Alas, RM couldn’t solve every corporation’s problems. Many airlines still went out of business, crushed by some combination of high legacy costs, soaring fuel prices, post-9/11 paranoia, the recession and good, old-fashioned corporate mismanagement.

Today, the purveyors and managers of RM systems face a whole new threat: the Internet and the tech-savvy customers it spawns as outlined in our cover story.

— Peter Horner, Editor
horner@lionhrtpub.com

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